Thousands of Filipino and US soldiers pouring into the southern Philippines over the next few days for annual war games will find it fraught with tension over the deaths of eight people, including two children, in an encounter with US-trained troops.

'I'm trying to calm them down,' Sulu Governor Sakur Tan said after widespread agitation over the killings last week in the coastal village of Ipil, on Sulu island, in the Autonomous Region of Muslim Mindanao.

Some Mindanao peace activists said the eight were massacred by the military, but the military says they died in 'a legitimate encounter' between troops and members of the al-Qaeda-linked Abu Sayyaf.

Major General Nelson Allaga, who oversees the area, said two soldiers had also died, indicating a firefight. But Mr Tan said friendly fire between the navy and army might have caused the deaths.

He has sided with the peace activists and ordered the Philippine flag flown at half-mast because 'innocent civilians were killed. The children were shot in the head'.

He said his staff took photographs of two children before they were buried.

They also photographed the body of village councilman Eldisin Lahim, 43, who had had one of his fingers severed.

The incident has triggered street protests and calls for the suspension of the fortnight-long 'Balikatan' (shoulder-to-shoulder) exercises.

The presence of many American troops is potentially inflammatory because a survivor claims to have seen four US soldiers during the incident.

The Philippine military units confirmed to have been involved were trained by US forces, whose presence as advisers in the region has been controversial.

The Consortium of Bangsamoro Civil Society had demanded an impartial investigation into the killings, which it said were 'a truly barbaric and gang-like act'.

The consortium is an umbrella group for 100 non-government organisations that is recognised by the US Agency for International Development for its role in conflict resolution in the south. The region has been the scene of a long-running Islamic insurgency.

The consortium said that based on its interviews with survivors and other witnesses, the incident happened early on February 4, when 'the special warfare group' of the Philippine navy and army 'in the company of US soldiers' came to Ipil in Maimbung town.

The umbrella group said the troops had been acting on a tip-off that Abu Sayyaf had brought a hostage - a Chinese businesswoman named Rosalinda Lao - to the area.

A resident, Ibnul Wahid, came out of his house when he heard the troops approach and identified himself as a vacationing Philippine soldier.

Despite showing his military identity, the soldiers branded him a member of Abu Sayyaf, tied him with plastic handcuffs and made him lie flat on his stomach.

'They then kicked his back with their heavy boots and stepped on it. After that, an M-16 rifle was pressed on his back and a full magazine of bullets was emptied to his spine, in front of his pleading wife,' the consortium said, based on a sworn affidavit from Wahid's wife, Rahana.

She claimed she was handcuffed and taken to a navy boat along with her husband's body.

There, she claimed seeing 'at least four US soldiers'.

Meanwhile, occupants of a navy inflatable boat allegedly strafed neighbours who were fleeing in a small wooden boat.

Survivor Saida Failan said they shouted at the soldiers not to fire because they were civilians.

Her four-year-old daughter, Marisa, and a boy, nine, were shot in the head. Five others, including a pregnant woman, were also killed.

The incident prompted the autonomous region's legislative assembly to approve a resolution to suspend the Balikatan exercises.

The Darul Ifta, an assembly of Muslim clerics, also urged a review of the Visiting Forces Agreement which governs US troops in the Philippines, its spokesman Uztadz Esmael Ibrahim said.

The gravity of the situation prompted defence secretary Gilbert Teodoro to fly to the regional capital of Jolo on Saturday, where he told local officials and residents: 'The instruction of the president is to have a credible investigation.'

Governor Tan, who won election as a candidate of President Gloria Macapagal-Arroyo's Kampi Party, issued a statement saying: 'We condemn the killings and those soldiers involved in the murder of innocent people must be charged in court and pay for their crimes.'

But he said he had given the go-ahead for the Balikatan exercise from February 18 to March 3.

He said it had not been confirmed that US soldiers were involved in the incident.

'Anyway, there is no relation between the Balikatan and the Ipil incident,' he said.

The US embassy's deputy chief of mission, Paul Jones, also assured him last week that 'there will be no military exercise in Jolo' and any American presence would be 'purely humanitarian'.